Is Corruption An Obstacle to Economic Growth? - Economic History in Small Doses 1

 By Girish Menon* 

Corruption is indeed a big problem in developing countries. In fact, the consensus among the IMF led consortia is that corruption is the biggest obstacle to economic growth and development. This has led them to conclude that there is no point in giving aid to developing countries because this money will not reach the intended beneficiaries. Such reasoning has led to serious cuts in the aid programmes of the developed countries. However, is corruption an impediment to economic growth?

Corruption is a violation of the trust vested by its stakeholders in the holders of office in any organisation be it a government, a corporation, a trade union or even an NGO.

 Life would be simpler if corruption produced unambiguously negative economic consequences. But the reality is a lot messier.  In the last half century countries like Zaire under Mobutu, Haiti under Duvalier have had their economies wrecked by corruption. At the other extreme, countries like Finland, Sweden and Singapore have done well in a non corrupt environment. At the same time there are countries like China, Japan, Taiwan, Korea and to some extent India who were corrupt but have done well economically. How is it possible that corruption has such different economic consequences in different economies?

A bribe is a transfer of wealth from one person to another. It does not necessarily have negative effects on economic efficiency and growth. If the bribe-taker is investing that money in another domestic project that is as productive as the bribe-giver would have invested in, then the venality may have no effect on the economy in terms of efficiency or growth. The critical question then is what happens with the bribe money? If the recipient indulges in conspicuous consumption or moves it to a tax haven then the economic effects may be worse.

Corruption may also distort government regulation. If a pharmaceutical company supplying sub-standard drugs can continue its practice by bribing the relevant officials, there will be negative economic consequences. However, if the regulation was an ‘unnecessary’ one then corruption may actually increase economic efficiency. For example if all the paper work to start a business takes a year (say) and paying a bribe gets the entrepreneur the green light in a month, then isn’t corruption adding to economic efficiency?

So the consequences of corruption depend on which decisions the corrupt act affects, how the bribes are used by recipients and what would have been done with the money had there been no corruption. In India, it is rumoured that some of the bribe money makes its way back into the constituency of politicians, after a round trip to tax havens. And that is not necessarily a bad thing!

* Adapted and simplified by the author from Ha Joon Chang's Bad Samaritans - The Guilty Secrets of Rich Nations & The Threat to Global Prosperity